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Tuesday, April 15, 2014

Economy In Pictures

by Lance Roberts

I have written extensively about the data behind the headline media reports. I have also discussed the importance of the relationship between the underlying data trends relative to broader macroeconomic perspectives. However, it is sometimes helpful just to view the various economic indicators and draw your own conclusions outside of someone else's opinion.

With the economy now more than 5 years into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is:

"Are we closer to an economic recession or a continued expansion?"

How you answer that question should have a significant impact on your investment outlook as financial markets tend to lose roughly 30% on average during recessionary periods. However, with margin debt at record levels, earnings deteriorating and junk bond yields near all-time lows, this is hardly a normal market environment within which we are currently invested.

Therefore, I present a series of charts which view the overall economy from the same perspective utilizing an annualized rate of change. In some cases, where the data is extremely volatile, I have used a 3-month average to expose the underlying data trend. Any other special data adjustments are noted below.

Leading Economic Indicators

Durable Goods

Investment

ISM Composite Index

Employment & Industrial Production

Retail Sales

Social Welfare

The Broad View

Economic Composite

(Note: The Economic Composite is a weighted index of multiple economic survey and indicators - read moreabout this indicator)

If you are expecting an economic recovery, and a continuation of the bull market, then the economic data must begin to improve markedly in the months ahead. The problem has been that each bounce in the economic data has failed within the context of a declining trend. This is not a good thing and is why we continue to witness an erosion in the growth rates of corporate earnings and profitability. Eventually, that erosion combined, with excessive valuations, will weigh on the financial markets.

For the Federal Reserve, these charts make the case that continued monetary interventions are not healing the economy, but rather just keeping it afloat by dragging forward future consumption. The problem is that it leaves a void in the future that must be continually filled.

In my opinion, the economy is far too weak to stand on its own two feet. With the Fed easing off the current rate of bond purchases, it will be interesting to see what happens in the months to come. While there will certainly be positive bumps in the data, as pent up demand is released back into the economy, the inability to sustain growth is most concerning. From this perspective, it could become increasingly difficult for the Federal Reserve to remove their "highly accommodative stance" anytime soon.